Understanding the difference between leasehold vs freehold is important, whether you’re buying your first home or you’ve moved a few times.
Sadly, it’s a topic that estate agents always seem to gloss over, however, it can cost you in the long run if your property isn’t what you thought it was.
Simply put the difference between these two terms is having a landlord and being the outright owner.
We promise to keep the legal stuff to a minimise and try our best to explain the terms in an easy to understand way.
What is a Freehold?
The term freehold dates back to the 11 century and is even in the Doomsday book! It means you own the land and building outright.
Outright ownership has many benefits. These include no ticking time bomb like a lease which lasts a certain length of time. There are no ongoing costs such as ground rent or service charges.
However, the buck stops with you. For example, If the roof starts leaking or heavy wind brings down the fence, then it’s up to you to sort it.
Most houses in the UK are freehold. However, we have seen the rise of new build leasehold houses. Usually, the underlying freehold is quickly resold by the developer to a third party, without the knowledge of the leasehold.
This company then increases the ground rent costs. They also push up the freehold price, meaning the average leaseholder can’t afford to buy their freehold. In some cases, it can be quite difficult to resell a property.
Thankfully the government is in the process of outlawing this practice.
Share of Freehold
This is a term that can cause a little confusion in practice. While Share of Freehold means what it says, there are a few ways to manage it.
For example, the freehold of a small apartment block may be equally split between a number of owners. The freehold is then held in the personal names of these owners. However, you’re limited to 4 apartment owners. Hence share of freehold only works on smaller blocks.
The more option is to place the freehold within a company, with the shares divided between the current owners.
However it’s set up, the end result is ultimately the same. You’ll have a share in the freehold of the property.
Like freehold ownership, you along with the other shareholders will be, responsible for maintenance. However, unlike a landlord or agent who will add their percentage on top, you can shop for the best price for services.
You’ll be in control of any funds that you pay into the upkeep fund. This means you’ll enjoy living in a nicer block than if a landlord owned it as there’s no profit motive.
The downsides are quite small. While it might shock you when you have to get quotes for ad-hoc maintenance or a new carpet, remember you’re able to negotiate directly with service providers.
Even though you own part of the freehold, you’ll more than likely have to pay into a sinking fund, similar to if you owned a leasehold apartment. However, you’re in control of the costs. So, while this annoying, you’re likely to pay a smaller amount than the leasehold equivalent.
If you start a company or given shares, then you’ll need to check that the accounts are up to date and there’s someone competent dealing with the admin side. Failing to have a company’s returns up to together may mean you have to pay a fine.
Miss a few deadlines and the company may be struck off. This will incur even more fees, times and headaches to put right. So, it’s worth asking questions and checking this before you move in.
As a fairly new concept, you might not have heard of Commonhold. Don’t worry it’s only been in operation since 2002 and is still pretty rare.
It allows freehold ownership of individual flats, houses and non-residential units within a building or an estate. Unlike a lease, there’s no time limit on ownership.
The rest of the building or estate forming the commonhold is owned and managed jointly by the flat or unit-holders, through a commonhold association.
Technically, an existing block can be converted to commonhold. However, this is unusual and the more common route has been to establish a share of freehold structure.
What is Leasehold?
With a leasehold property, you’re merely renting a property from a landlord (often known as the freeholder) for a fixed time. The lease signed by both parties sets out the conditions and the term length in years.
The lease’s duration is usually for 99 or 120 years, however, you can have shorter leases or buy a property close to the end of its lease. Once this period has passed, the property returns to the landlord.
While most flats are leasehold, houses can also be leasehold. For example, if you buy in a shared ownership scheme, it’s likely that your new property will be leasehold.
The freeholder is responsible for the upkeep of the common parts of the property include stairwells, roof, and the underlying land.
The lease may even set out how to resolve issues. For example, noisy neighbours, a warped front door or a new rubbish collection day.
The freeholder will usually sort the buildings insurance, saving you money.
The downsides of leaseholds are numerous. From the freeholder appointing a managing agent, who increases costs (paid for by you the tenant) and doesn’t appear to do much for the money.
To selling the freehold on to another person or company who comes in and raise services charges.
You might not be able to sublet, own a pet or face other restrictions. If you want to have any major work done then you might need to seek the freeholder’s permission before starting.
You should also expect to pay annual changes including ground rent, maintenance fees and services charges.
The biggest downside is if you don’t fulfil the terms of the lease, then you might have to forfeit the lease. So you’ll need to ensure you pay bills on time and in full.
As a lease gets close to the end, the property’s value decreases and it can become hard to get a mortgage on it or even remortgage. It can also be complex and expensive to extend a lease.
Leasehold vs Freehold
So as you can see, each type of ownership is different and has it’s own risks and rewards.
Remember you have more control as a freeholder but you’re also responsible when things go wrong.
Leaseholder, have less control and might see costs increase year on year with no noticeable improvements. However, as a leaseholder, it’s someone else’s job to ensure the building is safe and secure.
If you’re in the process of buying, it’s worth speaking to your independent lawyer and asking lots of questions – no matter how dumb you think they might be. The more questions you ask then better informed you’ll be to make a decision.